November 20, 2017

The Norwegian central bank, which runs the country’s sovereign wealth fund – the world’s biggest – has told its government it should dump its shares in oil and gas companies, in a move that could have significant consequences for the sector.

Norges Bank, which manages Norway’s $1tn fund, said ministers should take the step to avoid the fund’s value being hit by a permanent fall in the oil price.

The fund was built on the back of Norway’s hydrocarbon wealth, and around 300bn krone (£27.73bn), or 6%, is invested in oil and gas companies.

The recommendation by Norway’s central bank pushed down shares in European oil companies. Europe’s index of oil and gas shares hit its lowest level since mid-October on the news and was trading down 0.39% by late afternoon.

Offshore Wind Turbine installation in North Sea

“The return on oil and gas stocks has been significantly lower than in the broad equity market in periods of falling oil prices,” the bank explained in a statement.

“Therefore, it is the bank’s assessment that the government’s wealth can be made less vulnerable to a permanent drop in oil prices if the GPFG [sovereign wealth fund] is not invested in oil and gas stocks.”

The Norwegian government said it would consider the proposal, but a decision should not be expected until next year and a “thorough assessment” was required.

The bank did not set a deadline for when the fund should drop its oil and gas holdings. However, it made clear that its recommendation involved divesting from existing oil and gas shares as well as ruling out future investments.

The fund’s biggest oil and gas holding at the end of 2016 was $5.36bn in Anglo Dutch firm Shell, followed by $3.06bn in ExxonMobil, $2.04bn in fellow US oil firm Chevron, $2.02bn in the UK’s BP, and $2.01bn in France’s Total. It also has shares worth more than $1bn in oil services firm Schlumberger and Italy’s Eni.

The central bank’s move was welcomed by Paul Fisher, former deputy head of the Bank of England’s Prudential Regulation Authority and senior associate at the Cambridge Institute for Sustainability Leadership.

“It is not surprising that we see the world’s largest sovereign wealth fund managers no longer prepared to take the increasing risk associated with oil and gas assets, which do not have a long-term future,” he said.

The fund is the world’s largest sovereign wealth fund. It invests Norway’s revenues from oil and gas production for future generations in stocks, bonds and real estate abroad.

It is among the largest investors in a wide range of oil companies, holding stakes at the end of 2016 of 2.3 percent in Royal Dutch Shell, 1.7 percent of BP, 0.9 percent of Chevron, and 0.8 percent of Exxon Mobil.

“The risk for the oil sector is how many investment funds will downsize their exposure to extractive industries,” said Jason Kenney, oil analyst at bank Santander.

The fund also held 1.7 percent of Italy’s Eni, 1.6 percent of France’s Total and 0.9 percent of Sweden’s Lundin Petroleum, among others.

At the end of the third quarter, Royal Dutch Shell was the fund’s third-biggest equity investment overall, worth around $5.34 billion and exceeded only by its ownership in Apple and Nestle.

“It clearly stands out, perhaps not surprisingly, but not obviously, that indeed there is a substantial difference … in return between the oil and gas sector and the broad stock market in periods when the oil price changes substantially,” Matsen said.

“Oil price exposure of the government’s wealth position can be reduced by not having the fund invested in oil and gas stocks.”

The fund could still invest in the sector if other parts of the fund’s mandate are fulfilled by having some investments in some of the companies, Matsen said.

“But clearly the direction is that … if the ministry and the politicians think it is good advice and they say yes to it, clearly the investments in the oil and gas sector will decrease over time,” he added.